U. of Utah, David Eccles School of Business, United States
Why might large firms pursue incremental innovations? In this paper, we argue that firms with high-selling, "blockbuster" products are more likely to pursue incremental innovations related to those products, even when controlling for overall firm size. Drawing on detailed product-level data from the pharmaceutical industry, we show that firms with $1 billion drugs develop new products that closely resemble those existing blockbusters. This behavior, driven by demand- and supply-side adjustment costs, limits firms' incentives to invest in more novel innovations. Crucially, we show that the blockbuster model is associated with firms forgoing opportunities in commercially promising markets. Our findings provide insights into how blockbuster products shape firms’ innovation choices, with implications for understanding the dynamics of technological change in R&D intensive industries.
